Multipliers
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10 Terms
Multiplier Effect
A small change in spending causes a larger change in GDP.
Autonomous Spending
Spending not caused by a rise in income, such as government projects or corporate investments.
MPC (Marginal Propensity to Consume)
The fraction of additional income that is spent.
If MPC = 0.75
You spend $0.75 of every extra $1.
MPC formula
MPC = change in spending/change in income.
MPS (Marginal Propensity to Save)
The fraction of additional income that is saved; MPS + MPC = 1.
MPS formula
MPS = 1 - MPC.
Expenditure Multiplier
Measures how much GDP changes when autonomous spending changes; calculated as 1/(1-MPC).
Tax Multiplier
Indicates how GDP changes with tax changes; calculated as -MPC/MPS.
Final GDP Impact
Calculated by multiplying any multiplier by the autonomous change.
